The Monthly Payment Trap – Fun With Numbers

What if I told you that driving a $20,000 vehicle instead of a $30,000 vehicle could save you almost $100,000? Is driving that new vehicle rather than a good used car worth working another couple years?



If you purchase a $30,000 vehicle, pay for it with a car loan, and if you trade your vehicles in every few years your opportunity cost is likely around $100,000 over a 20 year period. This is compared to driving a good used vehicle for $10,000 less. This is just one savings of buying a good used vehicle rather than new, see 5 Reasons Not to Buy a New Car! for more detail.

The numbers get even more shocking if you NEED to drive a full sized SUV which will cost at least $40,000 new vs a $20,000 used mid-sized SUV. The opportunity cost for this decision is about $200,000!

Here’s how the numbers work.

Loan amount Term Rate Monthly Pmt Total Interest Total cost
$40,000 60 10% $850 $10,993 $50,993
$30,000 60 10% $637 $8,245 $38,245
$20,000 60 10% 425 5496 $25,496

The above chart compares the total cost of financing a vehicle at 10% over 5 years, at 3 different price levels, $20K, $30K and $40K. Based on this the total cost of spending $10K more on a vehicle is $12,748, if you spend $20K more it’s twice that much, $25,496.



Now, assuming that you’ll drive that vehicle for 5 years then trade it in for another similarly priced new vehicle, and if you plan to do this 4 times during your working life then the numbers look like this:

Vehicle 1 Vehicle 2 Vehicle 3 Vehicle 4 Total Savings
Present Value $12,748 $12,748 $12,748 $12,748
Rate of return 5% 5% 5% 5%
Term in Yrs 20 15 10 5
Compounding periods 12 12 12 12
Future Value $33,825 $26,503 $20,766 $16,270 $97,364

The above analysis is very simplified, but assuming that you were planning to purchase the more expensive vehicle, but instead purchase a less expensive vehicle you now have an additional $12K to invest. Assuming a 5% return, at the end of the 20 year period the opportunity cost is roughly $97K. Yes, the calculation front loads the savings, and there are other details that may not fit actual results, maybe you’ll get a lower interest rate, maybe a lower rate of return. However, I think the overall concept is well illustrated here and I would argue that the numbers are in the ballpark. It gets much worse if you spend an extra $20K each time you trade in your vehicle:

Vehicle 1 Vehicle 2 Vehicle 3 Vehicle 4 Total Savings
Present Value $25,497 $25,497 $25,497 $25,497
Rate of return 5% 5% 5% 5%
Term in Yrs 20 15 10 5
Compounding periods 12 12 12 12
Future Value $67,651 $53,006 $41,532 $32,541 $194,731

If you purchase a $40K vehicle vs a $20K vehicle every 5 years you give up roughly $200K…. Your retirement may be sitting in your driveway.

Now consider that this is one vehicle, most families have 2 or more. What about your credit cards, other personal loans. Yes, some purchases are necessary, you need a safe reliable car, you may need to occasionally carry a balance on a credit card. Life happens. But, the damage comes from carrying loan balances over long periods of time, as most people have come accustom. The monthly payment on a car that costs $10,000 or $20,000 more isn’t that much more, but as we see above the total cost of making decisions based on a monthly payment can be staggering.

Leave a Reply

Your email address will not be published. Required fields are marked *